This is the fifth in a series of articles sharing my thoughts about the entry of traditional finance into cryptocurrency markets. See the full series on this page.
Seems like nobody’s talking about a bitcoin ETF anymore, but they really should. It’s a true game-changer and destined to happen sooner than later.
Several Wall Street firms have asked for permission to create one and U.S. regulators will approve at least one of them eventually.
Once regulators approve a bitcoin ETF, they will cement bitcoin’s legacy as a legitimate asset and open the floodgates for passive investors to pour money into bitcoin, leading to a boom in price and mainstream adoption.
At least, that’s what most people say.
Will you consider an alternative viewpoint?
In my book, Consensusland, cryptocurrency is just what you use when you need to buy something. One type of cryptocurrency for day-to-day business, another for international shipping, another for lending, etc. The idea of buying cryptocurrency as an investment seems odd. Why would anybody want to do that?
This is probably how you think about national currencies.
When’s the last time you Googled the price of a kyat or wondered whether it’s a good time to buy yen? Have you ever charted the price of the US dollar against the Saudi riyal? When has CNBC run a segment on the how much the Turkish lira has dropped since 2014?
Bitcoin is really just another currency. Even U.S. Securities and Exchange Commission chairman says so. It’s the unit of account for bitcoin’s payment network.
Mark, what does that have to do with a Bitcoin ETF?
Perspective. It’s all about perspective.
We have ETFs for many currencies—euros, Swiss francs, pounds, reals, pesos, and many more. Some ETFs go long, some go short, and some simply index.
I’m certain you have never bought any of those ETFs. They’re for investors who want to speculate on foreign currency prices without actually holding foreign currency.
You could do that yourself, but it’s complicated and expensive. In the U.S., exchange fees run as high as 10 percent or more for common currencies, higher for rare currencies. People in your country probably don’t have foreign currency they’re willing to sell to you. You also need to learn how to report it on your taxes. And anyway, where will you stash your foreign cash?
ETF managers usually have connections or other advantages that let them buy, sell, and store foreign currency more cheaply and easily than you could.
You pay a small fee to let them do that for you, as opposed to a big fee to do it yourself. You never actually touch the currency, you don’t have extra paperwork, and you can sell whenever you want.
Meanwhile, your ETF manager takes a fee for offering this convenience. Everybody wins.
Bitcoin does not have any of those problems. It’s easy to get—you only need to download a wallet and tap a few buttons. It’s easy to sell—many wallets come with a built-in exchange.
It costs almost nothing to buy bitcoin from an exchange or wallet provider. You can store your bitcoin anywhere—even on a piece of paper.
Better still, you get to own your own bitcoin and use it however you want. With a bitcoin ETF, you don’t own your bitcoin, the ETF does.
There is no need for anybody to use a bitcoin ETF.
If you have 15 minutes and a computer, you can do it yourself.
If there’s no need for a bitcoin ETF, why do Wall Street firms keep trying to create one?
So they can make money.
They know people are interested in bitcoin. They knew it before this most recent pump in bitcoin’s price sent it back up the Google search rankings.
Investment advisors reported getting constant requests from clients asking to put some of their money into bitcoin. A 2018 survey of financial professionals showed institutional concerns were regulatory and legal, not financial. Even during the dark days of the 2018 crypto collapse, U.S. interest in bitcoin was growing and I’ve heard it has grown in other countries, too. Fidelity published a primer on bitcoin and CNBC covers it often. Even 60 Minutes ran a segment on it.
A portion of investors, money managers, and rich people want to gamble on bitcoin, they just don’t want to deal with wallets, security, and storage.
For a small commission or a modest fee, Wall Street will take all that hassle and risk away. It can’t do that when you buy and sell bitcoin yourself.
Bitcoin in every investment portfolio
Once the SEC approves a bitcoin ETF, it will end up a small part of all professionally-managed aggressive investment portfolios and many DIY investor portfolios. Bitcoin’s a non-correlated asset that sometimes booms and keeping a small portion of your wealth in a bitcoin ETF is an easy way to make money off of bitcoin without having to do KYC/AML, set up a wallet, protect your private key, or worry about somebody scamming you.
For example, you put 1 percent of your money in the ETF and next time it booms, you can take some profits.
If it all goes to zero, you don’t worry about losing 1 percent or less of your portfolio. You can lose more in the stock market any given week (sometimes in a day).
And, unlike ETFs that speculate on boring things like wheat and nickel and collateralized debt obligations, bitcoin’s ETF will attract casual investors who will “throw a few shekels” into it just because they heard from a friend or saw on the news that bitcoin’s price is going up.
In other words, an ETF will bring in a lot of money from people who wouldn’t normally care about bitcoin. Not a lot for them, but a lot for bitcoin.
Like pouring a pint glass into a thimble
Bitcoin is a small asset, barely a fraction of a fraction of the world’s wealth.
All the bitcoin in the world is worth about $180 billion as of this post. Global investment portfolios include about $40 trillion worth of assets, possibly double that amount. The U.S. alone has more than $22 trillion in assets held by registered investment institutions, which does not include personal wealth and foreign accounts.
If you charted bitcoin on a pie graph of the world’s wealth, you wouldn’t even see it (I tried).
I had to find another way to visualize it.
The rectangle represents the world’s wealth ($1 quadrillion). The dark blue strip represents the world’s investment capital ($40 trillion), and the yellow pixel is bitcoin’s slice of the pie. Tiny, even at $10,000.
A bitcoin ETF will be like scooping a pint glass into an Olympic-sized swimming pool and pouring it into a thimble. A tiny amount of water for the pool, but a deluge for the thimble.
Wait, Mark, that means bitcoin ETF will send prices to the moon!
That’s the conventional wisdom. Gold doubled within three years of getting its first ETF, and it was a far more established (and much larger) asset than bitcoin.
Don’t assume it will work that way. Copper tanked after its first ETF and still hasn’t recovered. Some analysts say ETFs don’t actually affect the price of their underlying commodities—markets still set prices and besides, if you weren’t interested in bitcoin before the ETF, why would you be interested in it after?
It’s hard to predict how high prices will go or how long the pump will last. New bull run? Another 2017-esque bitcoin mania?
Or a huge pump-and-dump?
An ETF makes it easy to move money into the markets … and out of the markets.
Most buyers of ETFs will be financial professionals and experienced investors, people who know how to make money from investing. These guys will not sit on a 500 percent gain because a random YouTuber says to HODL. They won’t buy after a 500 percent pump because somebody on CNBC says it will go higher. They study the markets, pick the best entries, and plot the best exits.
With an ETF, they can crash the markets as easily as they can pump the markets.
Also keep in mind, ETFs are a first-world investment instrument for well-connected or wealthy people. You can’t expect massive amounts of people to buy into the ETF. Your average person has never heard of an ETF and doesn’t know how to buy one, even if he or she had enough money to spare on the investment.
They’re more likely to have heard of bitcoin, but less than half of one percent of the world owns even a single satoshi of bitcoin.
As far as having their portfolio manager put a little money into bitcoin? Most people don’t have a portfolio at all, much less somebody managing it.
It’s also possible ETF shares will cost too much for your average person. For example, one ETF proposal has a minimum share price of $200,000.
On top of that, consider how many people don’t have access to financial products at all (in many countries, this is the norm). These people operate totally outside of a banking system and could never buy an ETF of any kind, much less bitcoin.
But let’s assume bitcoin booms after the ETF opens. Average people will start buying because they hear you can make money from bitcoin and see the price going up.
They won’t buy the ETF because they won’t have a broker or investment account. Instead, they’ll go to Coinbase or some other exchange to buy bitcoin directly. With no guidance and little understanding of bitcoin, these people will simply try to ride the wave higher, just like in 2017.
Once we get new highs and more publicity, those financial professionals and experienced investors will take some of their money out. It’s just what they do. You might, too.
If we go full boom, smart money will sell, quick—whether through the bitcoin ETF or a private broker or an exchange.
What about everybody else?
When that money leaves the market, who will be left to buy more bitcoin? How will bitcoin sustain its boom?
Wall Street will take its profits elsewhere. Brokers and dealers will chase the next big trend. ETF providers will stick around—if only to continue collecting fees from clients HODLing bitcoin for another boom that may never come.
Millions of people will lose money.
Wall Street always wins. A bitcoin ETF just makes it easier for them to do that.
Mark Helfman is a cryptocurrency commentator and author of Consensusland, a Readers’ Favorite 5-star book about a country that runs on cryptocurrency.